TALES OF THE TAPE: MCD

McDonald’s: Denis Hennequin, head of McDonald’s European operations, is leaving the company to become an executive director of Accor on December 1st after which, on January 15th, he will take over as CEO. This is a blow to MCD; Hennequin began working for the company in 1984 as an assistant store manager and has an impressive track record.

Cosi: Cosi continues to be one of my favorite long ideas. As I have been writing over the past number of weeks, the company’s shrink-to-grow strategy will effectively streamline the business and increase shareholder returns over the next few years. Sales trends are improving during all day-parts and operational initiatives are gaining traction. At present, the stock is outperforming the QSR category in terms of share price gains on a 1 day, 30 day, and 60 day basis.

Dine: Dine Equity reported strong results for 3Q10. Having eased balance sheet concerns by refinancing debt during the third quarter, their overall business was bolstered by Applebee’s revitalization strategy and later opening hours. DIN’s results certainly provide a challenge to Brinker but I am holding firm in my conviction that Chili’s will take significant market share from here as their own changes are implemented throughout their system.

Peet's Coffee: Peet's reported a strong quarter after the close. This is one of the better long-term growth stories in the space and growth will accelerate in FY11.

Howard Penney

Managing Director

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11/03/10 08:28 AM EDT

Professional Politicians Beware

"We must all strive to find common ground to support the middle class, create jobs, reduce the deficit and move our nation forward."

-Nancy Pelosi, November 2nd, 2010

While it will take many days for the final tallies to come in, it looks like our prediction will hold and that massive Republican turnout has driven a net gain in House seats of 65+ for Republicans. According to Nate Silver over at the FiveThirtyEight blog (one of the more accurate electoral statisticians we follow):

“Our current projection is that Republicans will finish with a total of 243 house seats: this would reflect a net gain of 65 from Democrats. The range of plausible outcomes is fairly small: our model thinks there is roughly a 90 percent chance that the G.O.P.’s total will eventually be somewhere between 64 seats and 66.”

As it relates to our prediction in the Senate, we were off slightly as a number of major Democratic candidates did marginally better than expected, in particular Harry Reid in Nevada. Currently, Alaska, Colorado, and Washington are still too close to call, but even if these States all go Republican the Democrats will still retain at least 51 seats in the Senate. Nonetheless, the Democrats should lose a net 7 seats.

Since it seemed statistically unlikely that the Republicans could take the Senate, the story of the night is really the massive seat losses in the House. To put it in historical context, this will likely be the largest seat loss in a midterm election for any party since 1938 under President Roosevelt, when the Democrats lost 72 House seats and 7 seats in the Senate. Clearly, the electoral results today are indicative of a strong statement being made by the American people.

The obvious conclusion from these results is that this is a repudiation of the Obama agenda. While we would be naïve to not agree at least partially with that, more broadly this looks to be a referendum on politicians themselves. To wit, given a historical incumbency advantage of almost 90%, the last three congressional elections of 2006, 2008 and 2010 have shown accelerated volatility of incumbent losses. Specifically, in 2006 the Democrats gained 30 seats in the House, in 2008 the Democrats gained 22 seats, and in 2010 the Republicans will likely gain back 65 seats. In a span of four years, we have seen massive volatility between the parties and the relative support from the electorate.

The chart of the day, which is posted below, underscores the key reason why this occurring. This chart highlights broad congressional approval. Currently, 73.8% of voters disapprove of Congress! If you were a professional politician yesterday and didn’t understand the implications of that yesterday, today you do in spades.

We’ve used a quote from Nancy Pelosi at the top of the note today to further emphasize our point regarding the popularity of professional politicians. While Pelosi retained her seat, her approval rating across the country as Speaker of the House was 29% heading into yesterday’s election. Her brief statement last night, assuming it is not just rhetoric, is actually what politicians collectively need to work towards for this nation. More broadly, the message this morning is clear from Americans, they are tired of rhetoric.

While the Republicans will take a few victory laps over the next few days, the gauntlet is now thrown to them. They have been given at least a nominal agenda and the next two years will be a test as to whether they can work with the President to move the country forward. The questions we would ask are: what is next for monetary policy, what can be done about the burgeoning budget deficit, and how can we address the escalating sovereign debt situation of the federal government? As Paul Rand stated in his victory speech last night:

“When I arrive in Washington, I will ask them, respectfully, to deliberate upon this. We are in the midst of a debt crisis and the people want to know why we have to balance our budget - and they don't.”

To take a deeper dive on some of these questions and to test the mettle of the rhetoric we will be hearing over the coming weeks, Keith and I will be hosting a call next Wednesday November 10th at 1PM with Peter Orszag, former Director of the Office of the Management and Budget. This call will be a similar format to the one we held with our friend Karl Rove in September. Peter will present for 20 – 25 minutes and he will then take questions for the duration of the call.

If there is anyone in the nation who understands what can and cannot be done to reduce the budget deficit, it is Peter Orszag. If you would like to join this call and are an institutional subscriber, or would like to trial our institutional service for the call, please email Jen Kane at . The budget deficit is one of the most pressing economic issues facing the United States; therefore we think this call will be a valuable use of your time.

To Rand’s point in his victory speech last night, the people of America are asking a lot of questions. The next two years will be a test as to whether the professional politicians are finally ready to answer the people with more than rhetoric. Needless to say, our Hedgeyes will be watching.

Yours in risk management,

Daryl G. Jones

Managing Director

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11/03/10 08:01 AM EDT

THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - November 3, 2010

As we look at today’s set up for the S&P 500, the range is 11 points or -0.80% downside to 1184 and 0.12% upside to 1195. Equity futures are positive following a mixed opening as investors digest Tuesday's mid-term election results.

Today is the long awaited FOMC meeting, and expectations for QE2, which most now expect will reveal a further $500B in asset purchases over the next 6 months.

But first, there is the ADP employment report plus ISM Non Manufacturing index and Factory Orders.

Major indices have edged into positive territory led by Banks, Construction and Auto plays.

BMW Group Q3 net €874M vs Rtrs €832M, Confirms 2012 targets

Societe Generale Q3 net €896M vs Rtrs €667.5M

UK Oct Services PMI +53.2 vs cons +52.5

Asian markets:

Nikkei closed, Hang Seng +2.00%; Shanghai Composite (0.47%)

Most Asian markets rose, in anticipation of monetary easing from the US later today.

Banks led a surge in Hong Kong after Goldman Sachs upgraded the Heng Seng on increased liquidity from QE2.

Tokyo was closed for culture day.

Australia rose, but banks gave up their early highs in light of a political storm over their profits

Australia Sep dwelling approvals (3.7%) m/m vs survey +1.0%

Howard PenneyManaging Director

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WYNN: HO HUM

Despite a very entertaining conference call – for a smorgasbord of reasons – WYNN’s quarter didn’t blow us away and we wonder how much upside there is to the numbers.

Was it good enough? Probably not. The special dividend was more telegraphed than a Brett Favre pass (this year). Sure, Macau EBITDA climbed 54% YoY but the market was up huge. On a sequential basis, Wynn’s Macau EBITDA was actually down 8% versus LVS, MPEL, and MGM, which were up +9%, +86%, and +36%, respectively.

As we’ve written about in the recent past, Encore has just not been that additive. MGM and possibly Singapore – Wynn has the highest concentration of players from southeast Asia in Macau – have taken share. Contrary to popular belief, MGM isn’t buying the business through higher commissions. Rather it is extending more and longer duration junket credit and simply running the property much more effectively – thank you Mr. Kwong.

Macau has a lot of growth and Wynn will flourish. However, the stock has had a huge run and we don’t see any near term catalysts now that the Golden Week fueled month of October is past and the special dividend has been announced. More supply is coming on next year and overall market growth is slowing. Market share may finally be important and on that metric, Wynn may lag.

RC volume was $300MM above our estimate due to an increase in direct play levels to 13% from 11% last quarter

Gross win was $2MM better than we estimated but net $431MM was $11MM lower than our estimate due to the rebate rate being 5 bps higher at 89bps of RC or 31% of hold vs our estimate of 29%

We calculate rebate as the difference between gross gaming revenues calculated at $821MM and net casino revenues of $627MM (total casino revenues less disclosed casino revenues in Macau)

Mass win was exactly in-line although drop was $22MM lower than we thought while hold was 80bps better

Slot win was $2MM lower than we estimate due to slightly softer slot handle

We estimate that fixed expenses increased to $102MM [either that or we saw a commission increase- won’t know until the filing comes out for Wynn Macau] from $87MM in 2Q2010

Las Vegas net revenue beat our estimate by $8MM and EBITDA by $11MM

Table drop was $25MM below our estimate but hold was 3.8% better which is why table revenues beat our number by $16MM. For your reference, the 10 quarter hold average is 20.4%, and using this average, revenues would have been $13MM lower

CRI: Opacity In, McGough Out!

I have officially been shut out of an analyst meeting for the first time in my 16-year career. Hey Carter's...there's this crazy little thing called Transparency. It matters, and I suggest you embrace it. Hedgeye is watching, and we see through the opacity of closed-door super-secret investor days.

"Sorry, the room is full." Really??? Are people really beating down the doors to hike up to Shelton CT in the middle of earnings season for the meeting? Also -- I worked in IR... No offense, but it was at a company 20x the size of Carter's. I've organized these events. There's no such thing as "no more room."

Can you believe that some companies still selectively pick who is invited to join the club?

If I were a real company with a real strategy and I firmly believed in both my strategic direction and earnings power (which is the case, by the way), I'd want to share MORE information with members of the investment community who are cautious on the story -- or flat-out short the stock. Guess what Carter's... when shorts cover it creates real demand for the stock.

Also, on that day when your stock crashes next year when people realize that the real underlying power is at least 25% below current expectations, or better yet -- if you proactively turn your fortunes around and prove me wrong -- don't you want one of the more influential voices on the Street to change along with the facts and get on board the stock? Do you think just MAYBE that institutions with meaningful buying power will pay particularly close attention? I suggest you ask them.

I'm willing to YouTube myself on all my analysis. Check it out below.

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11/02/10 08:46 PM EDT

Q4 Theme Update - Consumption Cannonball

One of our key macro themes here at Hedgeye in Q4, and for the next several quarters, is the Consumption Cannonball – a period during which government supports subside while expenses ramp creating increasing pressure on the U.S. consumer. Here’s the latest update in light of today’s data from Howard Penney of our macro team:

“First, the ISM prints beats at 56.9 in October (the highest since May) from 54.4, that’s good news. The contradicting and not all completely good news is that the upside appears to be completely driven by exports having increased 6 points in October while inventories dropped in October. Not really a positive sign given that exports are such a small part of the economy and that the inventory builds accounted for 1.5% of the 2% GDP in 3Q10 (prior to the upcoming revisions).

What about the part of the economy that does matter, domestic consumption? A few bullet points:

Both personal income and spending weakened in September. Personal income fell 0.1%: the first decline since last September.

The decline in income was driven by a $25.5 billion reduction in emergency unemployment insurance benefits. Emergency benefits had boosted transfer income by $20.5 billion in August.

Interest income (due to the Federal Reserve emergency interest rates fell 0.9% for the third straight month.

Tax payments are up, driving disposable income down 0.2%.

Real spending was up 0.1% driven by consumers diving into the savings rates which fell to 5.3% - matching its lowest level in over a year.

The Hedgeye consumer cannonball theme suggests that the next several quarters will be very taxing for the US consumer. The thesis is based on very difficult year-over-year comparisons as Uncle Sam runs out of crutches and can no longer prop up the consumer. A key takeaway from today’s data from the BEA is that transfer income is fading and taxes are on the rise.

While corporate profits are strong, the lack of confidence in the direction of the economy is holding back job growth as the unemployment rate will hit 10% before it will hit 9%. The data continues to bolster our conviction; the private sector cannot make up the slack in income and the economy is experiencing Jobless Stagflation.”

Howard Penney

Managing Director

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